We have had some tough years, which we expect with the cyclical nature of farming, but currently many farm businesses are seeing strong returns with the current milk price (and Global Dairy Trade auction results continuing to lift). When we’re at the top of the curve it can be hard to remember the bottom. Likewise, when we’re at the bottom it can be very hard to picture riding the top of the curve again. So this is a moment to pause, think carefully, and make good decisions in the long-term interests of the business and its people.
There isn’t a single “right” answer. Ultimately, this is money that belongs to the farm business and its shareholders, and what happens with it should come back to your overall goals and what you’re trying to achieve.
Before jumping straight into a decision, it’s worth taking a moment to look at the options.
This is often the first place people’s minds go, and for good reason.
Using the capital return to pay down debt reduces interest costs, improves cashflow, and strengthens the equity position of the business. For some farms, that alone can create a lot of breathing space and put the business in a stronger position for future opportunities.
The flip side is that once that money has gone into debt reduction, it’s no longer available for other things. That doesn’t make it a bad decision, it just means it’s important to weigh it up against other possibilities.
Another option is to distribute some, or all, of the money to shareholders.
To be fair, a lot of farming families and shareholders have worked incredibly hard to build the value that sits behind those shares. A payout can be a meaningful reward for that effort and strengthen the positions of the individual shareholders. Understanding the position of the shareholders is important and a dividend (if there are sufficient retained earnings) might provide personal financial flexibility or debt reduction, allow other investments or support the next generation and longer-term succession planning of the shareholders.
The trade-off is that cash and equity leave the farm business when money is distributed, which can reduce the overall strength of the balance sheet. Depending on your situation, that may or may not matter.
For some businesses, this capital return could be the perfect chance to move ahead with projects that have been sitting on the list for a while, or to grow the business.
That could include infrastructure upgrades, water or environmental projects, farm systems improvements, technology that lifts efficiency, diversification, or expansion.
Investing back into the farm can strengthen the business and improve its long-term earning capability, while also setting it up well for the next stage of growth and opportunity for shareholders or the family. The key question is whether the investment fits your strategy and what the return on investment will be over time, rather than simply spending the money because it happens to be there.
Let’s be honest, another option is to do something fun with it.
Farmers work incredibly hard, often through tough seasons and long hours, so there is absolutely nothing wrong with enjoying some of the reward when times are good.
Maybe it’s buying a bach, buying the boat, taking that family trip you’ve been talking about for years, or just doing something that brings a bit of enjoyment to the people behind the business.
It doesn’t have to be all serious financial decisions all the time. Sometimes celebrating the wins is just as important.
There is also absolutely nothing wrong with doing nothing for a while.
If there isn’t a clear opportunity or immediate need, leaving the funds sitting in the bank until a clearer path emerges can be a perfectly sensible decision. Not every dollar needs to be allocated on day one, however there is no return on this and the value of each dollar will depreciate over time.
Of course, it doesn’t have to be one or the other.
Many farms will likely take a balanced approach. A bit off the debt, a bit reinvested into the business, possibly a portion distributed to shareholders, and maybe something that sparks a bit of joy.
This spreads the benefit across a few areas and can feel like a sensible middle ground.
The most important question really comes back to this: what are the goals of the business and its shareholders?
This is where a bit of strategic thinking can be really valuable.
Strategic planning doesn’t have to be complicated or formal. Sometimes it simply means sitting down together with a coffee, or maybe a beer or wine, and talking through where you want the business to head over the next five, ten, or twenty years.
What matters most to you?
Is it growth, consolidation, debt reduction, succession, diversification, lifestyle, or a combination of those things?
Write a few thoughts down, talk them through, and share them with the wider team involved in the business. Clarity around your direction makes discussions like this one much easier.
An important step is to model the different scenarios before committing to anything.
Running draft budgets or forecasts for the different options allows you to see the outcomes in black and white. What does the business look like if you reduce the company debt? What happens to cashflow if you reinvest it? What changes if you split it across a few different options?
Having a budget and modelling out these alternatives allows scenarios to be compared and decisions to be made with real data, rather than just gut feel.
The information can also be easily shared with your trusted team. Budgets can be created, reviewed, updated, and refined as discussions progress. Clear reports make it much easier to communicate with shareholders, advisors, and other stakeholders in the business, and they help back up the strategic thinking with solid numbers.
Farm Focus is farm financial management software designed specifically for farmers to make this process simple. The platform is easy to navigate, with efficient budgeting and forecasting tools, and you can add users to have access so everyone involved in the business can stay on the same page, or export reports to distribute. And if you ever need a hand, the Farm Focus customer success team is always there to help.
For us it is invaluable to lean on the experience of others.
Times like this are when people such as your banker, accountant, consultant, and respected peers are worth their weight in gold. Ask them for advice, pick their brains, and lean into their experience.
And if you don’t have people in your trusted team that you have that kind of relationship with, it may be worth taking a moment to evaluate whether you have the right people around you.
Surround yourself with good advisors and peers you respect and enjoy working with. Different perspectives help ensure you’ve considered the pros, cons, impact on tax and longer-term implications of each option.
A capital return like this from Fonterra is a huge boost for dairy farmers, so take a bit of time with it. Have the conversations. Think about the bigger picture. Nut out the numbers.
The best decision will always be the one that supports your goals, your business, and your people.
This article is general commentary only and is not financial advice. Always seek advice from qualified professionals before making financial decisions.
